Can I do an IRA rollover and a Roth IRA conversion in the same year?November 2, 2012: 6:30 AM ET
I left my job in January and haven't worked again in 2012. When I left my employer, I rolled my 401(k) worth $90,000 into a traditional IRA. Since I have only one month of income this year, I am considering converting my traditional IRA into a Roth IRA. Can I do that in the same year as the initial rollover? — Michael
Without much income this year you're likely to be in a low tax bracket, which makes it a good time to do a Roth conversion, says Garry Good of Good Financial Planners in Bloomington, Ill. Good also notes that executing a conversion in the same year the money was transferred from a 401(k) into a rollover IRA shouldn't be a problem.
One word of caution: Despite being in a lower tax bracket, you'll probably have to pay taxes on the conversion. So be sure to have outside funds to cover your bill to Uncle Sam. If you plan on using money in your IRA to cover that tax bill, those assets will be subject to an additional 10% early withdrawal penalty if you are younger than 59 ½.
One option, says Good, is to consider a partial conversion to keep you from moving into a higher tax bracket. In that case, you could convert only enough to remain in your current tax bracket, and then wait until next year to convert the rest.
— Austin Kilham
Got a question for the Help Desk? Send it to email@example.com.